Tax System in Pakistan | Complete 2026 Tax Guide
Understand the tax system in Pakistan, income tax slabs, corporate tax rates, and indirect taxes with updated 2025 rules explained in simple terms.
Understanding the Tax System in Pakistan
The tax system in Pakistan is managed by the Federal Board of Revenue (FBR) which collects taxes from individuals, businesses, and companies, and oversees various kinds of taxes including income tax, corporate tax, sales tax, customs duties, and excise duties. Tax in Pakistan is divided broadly into direct taxes and indirect taxes. Direct taxes like income tax and corporate tax are paid based on your income or profits, while indirect taxes like sales tax, customs duty, and excise duty are applied when buying goods or services. This structure ensures that taxes come from various sources including salaried people, businesses, consumption, imports, and luxury items.
Income Tax for Individuals
For people earning a salary or wage, Pakistan applies a progressive tax rate under specified slabs. The idea is to tax more when income is higher. Under this slab system, individuals earning up to PKR 600,000 are tax-exempt and this design helps protect low-income earners while requiring higher earners to contribute more, making the tax system progressive and promoting equity. The tax year 2025–26 includes different income slabs for salaried individuals which define tax responsibilities depending on annual income brackets set by the government.
| Annual Income (PKR) | Tax Rate | Fixed Tax |
|---|---|---|
| Up to 600,000 | 0% | 0 |
| 600,001 – 1,200,000 | 1% | 0 |
| 1,200,001 – 2,200,000 | 11% | 6,000 |
| 2,200,001 – 3,200,000 | 23% | 116,000 |
| 3,200,001 – 4,100,000 | 30% | 346,000 |
| Above 4,100,000 | 35% | 616,000 |
| Progressive slabs help bring fairness to the tax system in Pakistan because those who earn more contribute more to the national revenue. This supports public services and national development without burdening lower-income groups. |
Tax for Businesses and Corporations
For businesses and companies, the rules are different. The standard corporate tax rate in Pakistan in 2025 stands at 29% for most companies. However, special rates exist for certain types of enterprises. For example, small companies under specific capital or turnover thresholds may enjoy a reduced rate of 20%. If a company is a resident in Pakistan, it is taxed on its worldwide income. Foreign companies, on the other hand, are taxed only on income sourced from Pakistan. Additionally, for some sectors or high-profit entities, a super tax may be applied on top of the regular corporate tax. Small and medium enterprises in manufacturing may also qualify for reduced tax burdens if they meet defined turnover criteria.
Indirect Taxes: Sales Tax, Customs Duty and Excise Duty
Besides income and corporate taxes, Pakistan’s tax net also includes sales tax, customs duties, and federal excise duty (FED). These are known as indirect taxes because they are not based on personal income but on consumption and imports. Everyday goods and services including groceries, electronics, mobiles, restaurant meals, and imported vehicles are subject to indirect taxation. These taxes are a major part of national revenue because they apply broadly to consumers and businesses. This wide coverage makes collection easier and ensures reliable cash flow for national development programs.
Recent Reforms and Changes (2024–2025)
The tax laws in Pakistan are not static. With each annual budget and fiscal amendment, slab rates, exemptions, withholding rules, and filing requirements may change. The 2025 reforms brought several key updates to make the system fairer. One of the major changes was raising the tax-free threshold for salaried individuals to PKR 600,000, helping ease pressure on low-income earners. At the same time, tax adjustments for individuals earning above PKR 10 million included a reduced surcharge rate to encourage better compliance. Reforms also covered withholding taxes, advance tax on property purchases, pension tax applications, and percentage changes on certain high-income categories. These changes demonstrate the government's intention to widen the tax net, reduce evasion, and simplify obligations for filers.
Why the Tax System Matters
A fair and efficient tax structure supports the country in funding public services such as healthcare, education, infrastructure, national defense, and welfare. Because Pakistan uses a progressive income tax model, it ensures that those who earn less pay little or no tax and those who earn more contribute a reasonable share. Corporate taxes and indirect duties expand the contributor base beyond just salaried individuals. This approach stabilizes government revenue even when markets fluctuate. Still, the system can sometimes feel complex due to frequent updates, multiple taxes, and different compliance rules for individuals versus businesses. This is why clear filing systems and FBR digital platforms remain important to boost compliance and trust.
Frequently Asked Questions (FAQs)
Q1: Who collects taxes in Pakistan? Taxes in Pakistan are collected by the Federal Board of Revenue (FBR) which regulates national tax enforcement. Q2: What is the tax-free income level for salaried individuals in Pakistan? Up to PKR 600,000 annually, a salaried person is exempt from tax under the current slab system. Q3: What is the current corporate tax rate in Pakistan? The standard corporate tax rate for most companies is 29%, but small companies may qualify for 20% under specific rules. Q4: What are indirect taxes in Pakistan? Indirect taxes include sales tax, customs duty, and excise duty, which apply to consumption and imports rather than income. Q5: Why does Pakistan use direct and indirect taxes? Pakistan uses both types to widen the tax base and ensure that revenue is collected not only from earners but also from consumers, businesses, and importers.